U.S. Trade Deficit Shrinks as Exports Hit Two-Year High

Aided by a decline in imports and a two-year high in exports, the U.S. trade deficit unexpectedly narrowed by 5.3% to $44 billion in September, the U.S. Commerce Department announced Wednesday.

A Bloomberg survey had expected the trade deficit to dip to $45 billion from a revised $46.5 billion in August, slightly higher than the initially estimated $46.3 billion August deficit. The trade deficit totaled $42.6 billion in July.

Aircraft Orders Lead Exports Gain

Exports rose only a modest 0.4% to $154.1 billion after no increase in August; however, this increase represents a two-year high. Meanwhile, imports unexpectedly fell 1% to $198.1 billion after a 2% increase in August.

The year-to-August trade deficit is $379.1 billion, still up up 40.3% from the $270.2 billion total for the same period a year ago. However, that's down from the 42.5% year-over-year increase recorded in August. The real goods trade deficit, which controls for inflation, decreased in September to $49.2 billion from $51.3 billion in August.

It's easy to see the major contributor to September's decent export performance: civilian aircraft orders, which surged 33%, led by commercial aviation giant Boeing (BA), which shipped 25 planes to international customers in the month, up from 17 in August.

Trade Deficit With China Drops, But Still Not Enough

American companies like Boeing, Caterpillar (CAT), and United Technologies (UTX) continue to benefit from a long-term modernization trend in the rapidly growing, emerging market economies of China, India, Brazil and Russia, as the countries upgrade their infrastructures.

Even the trade deficit with China -- a chronic problem area in the U.S. trade picture -- improved in September, dipping to $27.8 billion from $28 billion in August. However, it still remains very high, and September's dip is not likely to change the Obama administration's view that China must do more from a monetary standpoint to decrease a key global structural imbalance.

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The U.S. government argues that China's fixed-band yuan results in an artificially-low price for its exported goods -- helping companies in Asia's largest economy to grab market share and increase export revenue. The House of Representatives has already passed legislation that makes it easier for U.S. companies to claim they've been hurt by China's fixed-band yuan. However, the bill faces a tougher struggle in the Senate.

Conversely, China argues that it must keep the yuan fixed at a low rate -- presently about 6.64 yuan to the dollar -- to protect its embryonic companies and industries. China adds that the best way for the U.S. to reduce its trade deficit with China is for the U.S. to consume less and save more.

Economists generally prefer that a nation run a trade surplus as opposed to a trade deficit, as it usually implies that a nation's goods are competitive on the world stage, its citizens are not consuming too much, and that it's amassing capital for future investment and economic goals.

Weak Dollar Makes U.S. Products Cheaper Abroad

In September, trade surpluses were recorded with Hong Kong, $2.3 billion, up from $1.9 billion in August; Australia, $1.2 billion, up from $1.0 billion; Singapore, $700 million, down from $1.1 billion; and Egypt, $600 million, down from $400 million.

Trade deficits were recorded with China, $27.8 billion, down from $28.0 billion in August; OPEC, $8.9 billion, down from $9.0 billion; European Union, $6.1 billion, down from $8.1 billion; Mexico, $5.8 billion, down from $6.0 billion; Japan, $5.0 billion, down from $5.8 billion; Germany, $2.7 billion, down from $3.4 billion; Nigeria, $2.5 billion, down from $2.7 billion; Ireland, $2.2 billion, down from $2.5 billion; Venezuela, $1.9 billion, down from $2.2 billion; Canada, $1.1 billion, down from $2.2 billion; South Korea, $1.3 billion, unchanged from August; and Taiwan, $900 million, down from $1.2 billion.

September's trade deficit report was certainly a pleasant surprise. After a summer lull, exports inched higher to a two-year high, and the dollar's recent weakening -- should the currency remain at or near present levels -- will likely continue to boost exports. A weaker dollar -- which has fallen about 7% versus the world's other, major currencies since June -- makes U.S. products/services cheaper for international buyers.

Further, if the U.S. consumes less imported oil via conservation and use of alternate energy sources, and somehow resolves its complex trade situation with China so that its deficit with the Asian economic giant also declines, that would reduce the U.S. trade deficit even further -- resulting in more dollars retained at home and available for investment in U.S. companies.